Vince Cable, Treasury spokesman for the Liberal Democrats, has written to Lord Turner, the FSA chairman, asking him to investigate the claims. Photograph: Martin Argles

A former Financial Services Authority supervisor has accused the City watchdog of "turning a blind eye" in its regulation of building societies, allowing them to be "eaten alive" by investment bankers.

Vince Cable, Treasury spokesman for the Liberal Democrats, has written to Lord Turner, the FSA chairman, asking him to investigate the claims which he described as a "scathing indictment" of FSA regulatory practice, according to a report in today's Financial Times. "What may surprise you is the extent to which the problems continue and pose a threat to other societies," Cable wrote.

The FSA strongly rejected the claims. "This is not whistleblowing, it is green ink. The allegations made are a farrago of lies, distortions and half truths made by an obviously disgruntled former employee who clearly has an axe to grind," a spokesman said. "It does not paint a realistic picture of our supervision of building societies.

It also grossly misrepresents the qualifications of the supervisory staff in the area."

The whistleblower, who is reported to have been a supervisor at the FSA's retail firms division but now works in the City, contacted Cable just days before the Moody's downgrade.

The former FSA employee said: "I witnessed trusting and naive provincial building society executives and non-executives, who had no real understanding of securitisation or structured finance or any other aspect of the workings of global capital markets, being eaten alive by cynical, rapacious and short-termist investment bankers."

During the credit boom, lenders such as Dunfermline aggressively expanded into new areas such as commercial real estate, self-certified borrowers or buy-to-let mortgages. Deal fees soared – until the downturn, when borrowers could not pay their bills.

The whistleblower said "building societies have only ever been able to do one thing well: provide residential mortgages to prime borrowers". He criticised the failure of the FSA to prevent them venturing outside their areas of expertise into specialised lending during the boom.

In particular, in 2005 and 2006 big mortgage books were sold by wholesale lenders to building societies. The loans in those books were categorised as "full status" - but did not contain any proof of borrowers' incomes.

"We had unearthed incontrovertible proof that societies had been paying big prices for what were ostensibly the safest residential mortgages but were in fact risky self-certification loans," the former FA supervisor said. "FSA management turned a blind eye."

He added: "A culture of apathy and complacency marked the FSA in the period of its nadir, with anyone standing up against light-touch official policy criticised for rocking the boat and branded a troublemaker."

Even though building societies are still generally considered to be safe and sound, he warned that they had become "highly vulnerable" in recent years due to lowered asset quality, increased reliance on funding from the wholesale markets and undercapitalisation.

However, the FSA spokesman added: "On the question of Mr Cable's assertion that other building societies may be in difficulty: All of the building societies rated by Moody's [apart from Dunfermline] passed the stress tests we undertook last year in order for them to qualify for admission to the credit guarantee scheme. It would be wrong to imply that these societies were at risk."